Dollar plumbs one-month lows on weak retail

The Australian dollar fell to one-month lows against its US counterpart on Wednesday after weak retail sales data bolstered the case for further interest rate cuts this year, but still held near a 4-1/2 year high against an embattled yen.

The Aussie dollar fell as much as 0.4 per cent to a low of $US1.0345 after retail sales undershot expectations. A break there would take it to levels not seen since November 21. It was last at $US1.0356.

"Today's retail sales data was surprisingly weak and reinforces our view that the RBA will cut interest rates again in Q2 this year," said Jo Heffernan, senior economist at St George Bank.

The Reserve Bank on Tuesday held its main cash rate steady at 3 per cent, but left the door open for an easing should the economy disappoint in coming months.

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Interbank futures perked up on the data, pushing their implied yields lower. The May contract was almost fully priced for a quarter-point cut, while swap markets implied a better-than-evens chance of a quarter-point easing next month.

The next focus is the January employment report due on Thursday. Forecasts centre on a rise of 5,000 jobs and the unemployment rate to edge up to 5.5 per cent from 5.4 per cent.

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A weak report could greatly strengthen expectations for another interest rate cut in coming months, given the central bank is known to be closely watching unemployment.

Against the yen, it erased early gains to be a touch softer on the day at 97.05, having earlier scaled a 4-1/2 year peak of 97.40.

The yen was hammered across the board after BoJ governor Shirakawa surprised by announcing he would leave three weeks early on March 19. Analysts assume he will be replaced by a much more dovish leader who will push ahead with aggressive easing to try and defeat deflation.

Australian government bond futures pared losses after the sales data. The three-year bond contract turned positive to be 0.01 point higher at 97.160. The 10-year contract was 0.030 points lower at 96.500, but above an early low of 96.460.